The Pros and Cons of Fixed and Variable Interest Rates

Interest rates can be a complicated subject, but it is worth getting to know a few of the associated basics to navigate the big world of home loans.

First of all, interest rates are one of the main ways that banks make money. By lending you money, you in turn pay them back by paying a certain percentage on top of the initial amount.

The tricky part is that it can be difficult to see on a month to month basis how much of your mortgage payment is made up of the principal owing and how much of it is interest.

This is why it is important to establish the ground rules of your home loan agreement early on and make an informed decision about the type of interest rate you will choose.

Fixed interest rates are usually set at the time of your agreement and are not supposed to change throughout the life of your loan.

The advantage of this is that you always know how much you will be paying, but the downside is if interest rates suddenly fall you will not be able to take advantage of the savings.

Variable interest rates work in the opposite way - the rates could fluctuate regularly based on economic factors and decisions made by the Reserve Bank of Australia, meaning you could be negatively impacted if the rate goes up but will benefit if it goes down.

There is also the possibility of having a part fixed, part variable interest loan or comparison rates.

A chat with your mortgage broker will help you discern between these different types of loans and make the best choice for your personal situation.

To get more detailed information on your situation, talk to a Loan Market mortgage broker today.